‘Heroic’ or ‘malfeasance’ — a look at the Bernanke era

A review of the major moments in the Fed chairman’s career

Early in 2007, Gary Stern, then the president of the Federal Reserve’s Minneapolis regional bank, was asked what he made of Ben Bernanke, then the relatively new kid on the block. At the time, Bernanke had only been chairman of the Fed for a year. At that time, Stern had been president of the central bank for 22 years and was the longest serving regional Fed bank president.

He’s a decent guy, Stern replied.

Stern, who is now retired from the Fed, said recently that his judgement has held up over the last seven years. “Ben Bernanke is a very thoughtful, considerate, decent man who did a heroic job,” he replied, in an email message.

To the people who served with him, Bernanke, quiet and unassuming, is a hero.

Not everyone agrees. Many Republicans believe he cushioned President Barack Obama from failed economic policies.

In a recent commentary, Steve Hanke, a professor of economist at Johns Hopkins University, says Bernanke’s days at the Fed “have been marked by monetary misjudgments and malfeasance.” He argued that Bernanke paid too much attention to inflation targeting and not enough to the dollar’s exchange rate and money-supply gauges.

The following is a look back at some of the key moments in Bernanke’s career.

Bernanke’s baptism by fire to the ways of Washington came a few months after he took the helm of the central bank in February 2006. Attending the glittery Washington Correspondents’ Association dinner, Bernanke had a nice chat with TV news anchor Maria Bartiromo. The following Monday, Bartiromo went on her show and revealed the contents of the conversation, and sent the market into a tailspin because they were more hawkish than Wall Street would have expected. Traders squawked and official Washington snickered .Bernanke was forced to eat humble pie when pressed about the incident in a public hearing by Sen. James Bunning, a Republican from Kentucky, who was his leading Senate antagonist. The result was that Bernanke kept his distance from the Washington establishment, only interacting with reporters in formal settings and never fraternizing on the Washington social circuit. He never attended the annual correspondent’s dinner again.

Bloomberg News

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The crisis explodes

Like a trail of gunpowder in a Road Runner cartoon, the Fed, the media and Wall Street watched as the mortgage-backed securities crisis spark and smoke over the course of 2007. Some argued it was important. Others argued it was a flash in the pan. Not many saw that the burning powder was going to reach the explosives until late July 2007 when Bear Stearns liquidated two hedge funds that invested in the MBS. Markets wobbled. The Fed tried to remain stoic, holding policy steady at its early August meeting.

But jittery markets swooned, and the Fed quickly reversed course and attempted to soothe markets with statements that it was alert and ready to act to support the banking system. Bernanke and his closest Fed associates met behind the scenes at Jackson Hole to discuss the crisis. Experts attending the meeting warned of worse days ahead.

In September, the Fed cuts its target funds rate to 4.75%. The stage is set for conditions to get worse.

But at the Fed, there was a feeling that the stress in the market was something that could be handled.

“At that point, it was not obvious whether this was going to be the start of something bigger or whether it was something more comparable, say, to some of the disruptions we’ve see in the ‘90s, for example, around the Russian debt crisis, for example,” Bernanke said during a discussion of his handling of the crisis at the Brookings Institution.

Bloomberg News

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The tallest trees in the Wall Street forest fall

Hope that a large crisis could be averted were dashed when Bear Stearns, an investment bank founded in 1923 and celebrated as a sly and aggressive investment bank, was rescued from disaster over a weekend in March 2008.

Many experts howled at the central bank’s intervention, believing that the Fed had crossed the line into fiscal policy matters best left to the White House and Congress.

This dissenting view will only grow louder over time.

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A tranquil summer is mistaken for the end of the crisis

There is a period of relative calm in the aftermath of the Bear Stearns collapse.

Bernanke and his colleagues stopped cutting rates in June and August, and indicate that inflation was a big worry.

This period of inaction from the Bush White House and the Fed seems negligent in the face of subsequent events.

Bernanke brought up this period in his Brookings remarks, insisting that the central bank was very alert and attentive behind the scenes, but admitting that there was “some hope that things might calm.”

AFP/Getty Images

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Convincing Congress to save the financial system

The worst fears about the crisis were realized after Labor Day 2008 when Lehman Brothers Holdings Inc. filed for bankruptcy protection after Fannie Mae and Freddie Mac are seized by the government.

The Fed also lent $85 billion to prevent the collapse of American International Group.

Treasury Secretary Henry Paulson, Bernanke and New York Fed President Timothy Geithner worked closely together to come up with a plan to provide $700 billion in emergency capital to the banking system.

At a public hearing on the proposal, members of Congress quickly grew irritated by Paulson’s imperious approach. Bernanke moved in to calm the waters and persuaded lawmakers that the program is necessary.

Although the House initially rejected the legislation, the measure passed and signed into law in early October.

Through help for the banks and some economic stimulus, the deep recession eventually ends in mid-2009. But with a wounded financial system, the economy can only sputter along.

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In emergency mode

By now, the breath of the damage of the economy was clear to the Fed, and the central bank raced to cut short-term interest rates even further. By December 2008, the target federal funds rate was close to zero, as low as it could go, where it has remained for five years.

The following March, Bernanke and his colleagues began the first of three rounds of bond purchases, which expands the Fed’s balance sheet to over $4 trillion.

Many in the markets think the Fed was just delaying the necessary eventual economic adjustment. Republicans think Bernanke is just helping Obama. Others are worried the bond buying will lead to inflation down the road.

CBSNews

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Stepping out from behind the curtain

Facing a backlash from the weak economy, the Lehman bankruptcy, the $700 billion bank bailout and the rescue of AIG, Bernanke took the previously unheard of step to sit down for a interview on “60 Minutes.”

Before this step, U.S. central bankers had always taken pride in their ability to be obtuse at critical moments.

“This is a chance for me, I think, to talk to America directly,” Bernanke said.

As he walked through his home town of Dillon S.C. with a reporter, Bernanke insists the actions taken to stem the crisis were aimed at helping Main Street and not just Wall Street.

Getty Images

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Meet the press

Continuing in his effort to be transparent and the explain the Fed’s actions, Bernanke decides to hold quarterly press conferences.

Meeting with reporters was just one of several steps Bernanke took to increase transparency at the central bank.

In 2007, the Fed began releasing quarterly economic forecasts. And in January 2012, the central bank formally adopted an inflation target, setting out its longer run goals and policy strategy.

At the first press conference in April 2011, the New York Times reported that the Fed chairman answered questions in a “serious manner of the college professor he used to be.”

That pattern holds for the next two years.

Getty Images

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A Texas tussle

Texas Republican Congressman Ron Paul was known for years among Fed watchers as the congressman who liked to tangle with the Fed chairman over the gold standard and the nation’s fiat money system.

This remained a fairly esoteric topic until criticism of the Fed grew in the wake of the bank bailout and the financial crisis. Paul’s relentless criticism of the central bank struck a chord among the conservative’s Republican base.

Paul decided to run for president and other Republican presidential candidates began to compete with each other to say negative things about Bernanke and the Fed.

The attacks reached a low point when Gov. Rick Perry of Texas said Fed policy was “treasonous” and that he would be treated “pretty ugly” in Texas.

Although the Fed did not feature in the campaign between Republican challenger Mitt Romney and Obama, disquiet about the Fed remains strong among House Republicans who still seem eager to find ways to rein in the central bank. If the Republicans can win the Senate this fall, some form of legislation restricting the Fed is likely to garner attention.

Bloomberg

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Passing the torch

Little is known about Bernanke’s decision not to seek a third term as Fed chairman. Obama said that the Fed chairman stayed “longer than he wanted.”

Bernanke stayed exceptionally quiet while a battle raged among Democrats over who should succeed him. Eventually, the White House and Senate Democrats settled on Bernanke’s No.2 at the Fed, Janet Yellen, a life-long central banker with a grandmotherly charm that masks a steely resolve.

At the Fed’s last rate-policy meeting in December, Bernanke took the first step towards the exit of his unconventional policy, which many say will make Yellen’s life much easier. Experts do not expect Yellen to change the course of monetary policy.

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